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For long the turf of public sector undertakings, private players had nothing more than an ornamental presence in the oil-refining sector. That was before the Ambani's came calling. And just as it took only the smallest child to point out that the emperor had no clothes, it was left to Reliance Industries (well…not a child, but essentially a newcomer) to prove that oil refining was not a PSU monopoly. …Thus was born Reliance Petroleum Limited.

Reliance Petroleum Ltd (RPL) has the world’s largest grass root refinery (27mtpa) at Jamnagar -Gujarat, accounting for 25% of India's refining capacity. RPL also has India's largest marine oil terminal at its captive port facility at Jamnagar, which has the capacity to handle 50mn ton of products every year. All very well… but it is only when the company is seen against the background of industry dynamics, does the diamond gets its shine.

RPL has the lowest per mn ton capital cost of Rs5.18bn, which is 40-60% lower than per ton capital cost of other refineries set up in the Asian region. Notwithstanding the huge capacity base, which naturally leads to economies of scale, the plant is currently operating at cent percent capacity. But it is in crude oil procurement that the RPL advantage comes to the fore. RPL is ensured a steady supply of crude through agreements with overseas oil companies. This coupled with the fact that the refinery is designed to process a wide range of crude from the lowest quality to the highest quality, reflects the edge the company enjoys. Therefore, when the global crude price hovers around $25/bbl-$27/bbl, RPL was getting its raw material at an average price of $23/bbl. More importantly, the quality of the final product did not suffer. And when refining margins worldwide averaged at $4-6/bbl, RPL outshone its peers with gross refining margins of $5/bbl!

Reliance Industries Ltd, through its 100% subsidiary Reliance Industrial Investments and Holdings Ltd and Reliance Refineries Pvt. Ltd in 1992 promoted RPL. Today RIL with its subsidiaries control 64% of RPL. But perhaps, what the management will be commended is the vision they exhibited in building this colossal refinery packaged in all the deals that insulate it from the vagaries of the oil business. And if results were anything to go by, RPL exhibited a profit Rs3.24bn in the very first quarter of commercial production. But what will finally prove to be the difference, as far as the management is concerned, is the Ambani brand name. For they have the pedigree, the strength and the experience in running complex businesses. And for the investor, it spells the sweet sound of safety and growth.

The most important attribute of this company vis-à-vis its cash flows is that its revenues are not linked with the oil pool account. This effectively ensures that there is actual and timely cash inflow. The company has entered into take or pay contract with the marketing companies for the controlled products. Payments are made within two weeks of delivery, which ensures lower debtor turnover and thereby lower working capital. And hence, RPL and its cash will likely never stay apart.

Reliance Petroleum limited has many things going for it. For one, this complex refinery's ability to process all kinds of crude will make it the least susceptible to crude oil prices. This complexity will also make it easier for the company to adapt to the fluctuating demand-supply scenario of controlled products like petrol and high-speed diesel. Moreover, its huge capacity of 27mtpa (which can be increased further through de-bottlenecking) gives it the economies of scale to lower the processing costs.

But what differentiates this refinery from other players, is the dynamic and competent management. Not only did it guarantee itself a steady supply of crude through long-term agreements with overseas oil companies but they also ensured that their products would not go abegging due to lack of marketing support by their take-or-pay agreements till 2002. And with their well - chronicled interest in acquiring any of the PSU refining and marketing companies, the marketing Achilles heel will remain a figment of the past. But it is when you view the potent mix holistically that the picture gets better - a steady supply of crude, a complex refinery configured to produce high quality products at above average refining margins, a ready market to absorb the products and finally a management with the Midas touch to turn anything into (black) gold. This company, with the largest market capitalization of Rs290bn among refining companies in Asia, is a long-term buy in every sense of the word.

For one, post 2002, the lack of a proper marketing support may act as a chink in the company's armour. For another, the foreign players with similar quality products might eat into RPL's market. And…yes, competition in the form of non-conventional sources of energy can reduce the importance of oil products. …But it is hard to believe that these aberrations have not been taken into consideration by the management, for that is what differentiates Reliance from the rest of 'also played'.